Bond Traders See MiFID's Silver Lining as Rules Crack Open Data

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This content was published on November 8, 2017 3:01 PMNov 8, 2017 - 15:01

(Bloomberg) -- European bond traders are looking on the bright side of tougher transparency rules -- unprecedented market data that can help them make sure they’re not getting ripped off.

New regulations will require details on many transactions to be published within 15 minutes, and sometimes before the trade has gone through, previously unheard of in the traditionally opaque bond market. Some dealers and investors are starting to plan how they will capture and analyze the data to help them work out fair values for trades.

“Everyone should be analyzing and using the data to better understand the market,” said Mehmet Mazi, HSBC Holdings Plc’s global head of credit trading, and a speaker at this week’s Fixed Income Leaders Summit in Amsterdam. “Firms who do this smarter will have an edge.”

Traders are welcoming the influx of data even though it risks making their jobs harder by potentially exposing their intentions to other parties in the predominantly over-the-counter market. The change is part of the European Union’s Markets in Financial Instruments Directive, or MiFID II -- a wide-ranging overhaul of trading rules starting Jan. 3 that stretches from paying for investment research to proving best execution in trades.

Under the new rules, bond-market participants will have access to information that will likely include the price, size, currency, date and time of trades and the venue they were executed on, according to trading platform MarketAxess.

Join our TOPLive Q&A blog on MiFID II on Nov. 8 at 2:00 p.m. London.

“We’ll have better quality data and hopefully that will help create trading opportunities,” said Fabien Oreve, the global head of trading at Candriam, which manages about 110 billion euros ($130 billion) of assets. “The big topic now is collecting and interpreting data,” said Oreve, who will be a panelist at the conference in Amsterdam.

Candriam already analyzes its own historic data to help get the best terms in trading. Other asset managers including AllianceBernstein Holding LP, Pictet Asset Management and Union Investment have done similar research. The work includes looking for patterns in the buying and selling of bonds with different counterparties.

Bloomberg LP, the parent of Bloomberg News, offers bond-trading systems, and services for transaction reporting and best execution to meet the new rules.

The MiFID II changes will increase liquidity in some bonds because traders will be able to determine prices more easily, said Gareth Coltman, head of European product management at MarketAxess. This will also drive automation, potentially helping market makers trade a wider range of bonds and do deals more quickly. HSBC is deploying algorithms that will price 5,000 securities by the end of March, Mazi said.

Limits to Transparency

Still, the transparency effect will be limited because the strictest reporting rules will only apply to the most liquid notes. Only about 60 percent of sovereign-bond trades and about 2 percent of corporate-bond deals will be made public, according to MarketAxess. The portion may rise under plans to phase in wider coverage over the first four years.

For bond traders, the most concerning aspect of the new regime is meeting the post-trade reporting requirements, according to a survey of 100 heads of fixed income by WBR Digital, the organizer of the Amsterdam conference. New rules on paying for research and pre-trade reporting standards were also major concerns.

The impact “on work practices will be massive,” said David Bullen, director at independent advisory Bullen Management. “Desk heads on both the buyside and the sellside are already and will increasingly spend a lot more time and money on IT and data strategies.”

Bullen also highlighted the risk that some bonds may be “delisted” from electronic trading venues because the issuer doesn’t have a global identification code called a Legal Entity Identifier. These codes will become mandatory under MiFID II.

Hedging Concerns

Greater bond-market transparency may make it harder for traders to hedge or reduce positions because if rivals become aware that someone is selling, they may attempt to front-run them. Regulators have attempted to address these concerns by setting longer deadlines for publishing details about larger transactions and for deals involving less-frequently traded notes.

Still, the new visibility on smaller trades may prove valuable if it helps traders work out prices for large deals, according to Antonio Pilato, head of trading desk at Generali Investments in Milan.

“What matters is how you use the available data on small tickets to come up with a strategy for executing larger tickets,” he said.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net.

To contact the editors responsible for this story: Shelley Robinson at ssmith118@bloomberg.net, Neil Denslow